Facts, not fear, when it comes to St. Paul rent stabilization

5 April 2022

This past November, St. Paul voters came together across ethnicity, class and zip code to vote in favor of keeping our neighbors in their homes and adopted a new rent stabilization policy. This policy — crafted by tenant advocates, policy experts and community members, then voted into effect by a clear majority of St. Paul voters — will hold annual rent increases to 3 percent, which is the historical average increase over the past few decades.

Few policies outperform rent stabilization when it comes to increasing neighborhood stability. But the idea irritates your amateur economist friend, and now a few developers have threatened to pack up their toys and leave the sandbox. Only, their math doesn’t check out.

I love St. Paul. I want what’s best for my city. I grew up in Highland Park eating corned beef on rye at Cecil’s, enjoying the paths along the Mississippi and playing at the Little League fields on South Cleveland. I went to law school in St. Paul, and I’ve spent the past 30-plus years as a commercial real estate finance lawyer, representing a variety of clients including those building multi-family projects. I’ve managed the real estate function for large company portfolios, which included construction, development, leasing, financing, purchases and sales, so I’ve seen a thing or two when it comes to these matters.

It’s important for us all to deal in facts, not fear, as the City of St. Paul works to implement the rent stabilization policy that voters approved. Certain developers are now fanning the flames of fear and blaming St. Paul voters in an attempt to hold our city hostage. As the story goes, either we allow them to generate unfettered profit at the expense of community or they’ll disinvest from St. Paul entirely. No one has provided concrete proof to link project pauses or developer flight with rent stabilization. Development takes time, and projects often pause — with now the most likely cause being due to material and labor shortages during a global pandemic.

The reality is that St. Paul’s rent stabilization policy brings stability to everyone, something just as important to the economy as housing supply. Despite the cries from developers, St. Pauls’ rent policy balances the interests of the community and the developers that invest in it. It will allow developers to finance projects in line with traditional financing parameters and enable residents to stay in their homes without fear that they will have to pay ever-increasing rents. We should think critically about the outsized role we allow developers to play in this discourse and which ones are the right developers for our communities.

Those well-versed in housing finance know that when a developer explores financing options, a pro-forma is created that projects costs and income over a 10 or 20 year period. In my experience it is rare that these pro-formas include rent increases greater than 3 percent.  A developer who projects rapidly spiking rents every year is signaling less certainty and therefore a riskier investment to its potential investors and lenders, while a developer who stays within historic market margins — such as 3 percent — signals more certainty and will attract more capital.

Tim Walsh

This translates into how projects are valued and financed. There are many methods, but typically it is based on applying a capitalization (return on capital) rate to net operating income (NOI), calculated by subtracting expenses from rent income. The capitalization rate is based on the perceived risk or certainty of that cash flow level being maintained.  A higher return offered or required signals perception of higher financial risk and therefore the market designates a lower value of the project. At the outset of every project, developers must determine what kinds of returns they need in order to get investors and/or lenders on board.

I may be a lawyer, but we’re not here to re-litigate the decision that St. Paul voters made together. The City of St. Paul must transparently implement the policy that voters approved, without presupposing any specific outcomes based on monied interests. I am proud to be from a city that has set a new standard for housing justice nationwide. Now, let us be guided forward by informed dialogue, real data, and an unwavering commitment to honor democracy and the will of St. Paul voters.

Tim Walsh is a commercial real estate finance lawyer from St. Paul.

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